Bank earnings have kicked off the year with divergent results, moving some stocks to the top of the class and others beginning the year behind the curve.
Big banks like Wednesday's Stock of the Day Goldman Sachs (GS) and Bank of America (BAC) saw shares surge after earnings beats bolstered by strong underlying segments, while others like J.P. Morgan (JPM) saw shares slide as quarterly reports came in under expectations.
"The good companies will continue to grow revenues and tangible book value," Barclays analyst Jason Goldberg told CNBC on Wednesday.
So, looking back on the reports from the big banks this week, it is time to grade what the truly "good" reports were.
- Revenue of $17.124 billion (down 2% year over year)
- Markets and Securities Services revenue declined 11% year over year
- Fixed Income Markets ($1.9 billion, down 21% year over year)
- Earnings per share of $1.61 (up 26% year over year)
- Markets and Securities Services revenue declined 11% year over year
Citi (C) started off the week and served to set the table for earnings on the week with a mixed result that was aided by management commentary that soothed some nerves that remained frayed over the firm's fixed income losses.
CEO Michael Corbat calmed the market with a forecast of stabilization that helped lift the stock to a positive result and produced a market more forgiving of fixed income difficulty for those following after its report.
"We believe this was another solid quarter for the company because the trading downside should have been well reflected in the stock and there were no major problems disclosed that would otherwise justify a valuation below tangible book.," the Action Alerts PLUS team commented.
Given the stock's steep fall into year end, the pick up in confidence from the market that fueled a rebound on earnings day plays positively for the broader banking sector.
"We appreciate the steps the new management has taken to build trust with the sell-side, including greater reporting transparency and more detailed explanations of the company's business plans," Jeff Marks, senior portfolio analyst for the AAP team said. "Small steps like this can go a long way."
- Revenue: $20.980 billion, ($21.739 consensus), down 4.9% year over year
- Community Banking: $11.461 billion, down 3% year over year
- Wholesale Banking: $6.926 billion, down 6.9% year over year
- Wealth & Investment Management: $3.957 billion, down 8.7% year over year
- EPS: $1.21, ($1.19 consensus), up 4.3% year over year
Wells Fargo (WFC) reported as one of the weaker banking stocks even as many in the sector saw stocks surge.
The company's quarter reflected some weakness in community banking and investment management, which certainly was not helped along by the bank's consistently tarnished reputation I recent years.
As TheStreet's Bradley Keoun pointed out, the bank has been lumbering under the regulatory sanctions since February 2018, after a slew of allegations of customer abuses that have already cost shareholders $4.5 billion in penalties, refunds and extra legal costs to resolve disputes. Under the sanctions, Wells Fargo is banned from any growth in its assets -- such as its book of loans and investment securities -- beyond $2 trillion.
Total assets have suffered, as they fell to $1.9 trillion at the end of 2018 from $1.95 trillion at the end of 2017.
The stock implication of the results was a negative one.
Worse yet, CEO Timothy Sloan told analysts the issues at Warren Buffet's biggest bank holding might take even more time to iron out.
"It's just taking a little bit longer than what we had originally anticipated," he said.
As such, it was little surprise that investors were more willing to wait than buy in at the stock's depressed level.
- Net Revenues: $26.804 billion, ($26.840 consensus), up 4% year over year, down 4% quarter over quarter
- Corporate & Investment Bank: $7.237 billion, ($8.023 consensus), down 4% year over year, down 18% quarter over quarter
- Asset & Wealth Management: $604 million, down 8% year over year, down 17% quarter over quarter
- EPS: $1.98, ($2.20 consensus), up 85% year over year, down 15% quarter over quarter
J.P. Morgan came in with one of the more disappointing results, missing on top and bottom line estimates from analysts.
"We're not immune from the weather, volumes and volatility," CEO Jamie Dimon explained. "We're not immune from market prices and assets going up and down."
The bank was particularly in FICC, with the division reporting a larger than expected loss, following Citi's lead.
"The main drag on earnings was FICC trading revenues which were down 16.3% from an already weak quarter last year," Oppenheimer analyst Chris Kotowski wrote. "Equities were up, but since FICC is bigger, total trading was down 5.7%. That was short of the early December guidance."
Kotowski rated the stock a "Sector Perform" as the short term nature of the drag on earnings will obscure results for a time, but shouldn't cloud the outlook for those holding the stock.
Dimon worked to keep investors minds on the market share the bank commands, which is more pertinent in his view.
"I really don't pay that much attention to speed bump a little bit but fact that volumes are low in last 3 weeks of December," he said. "I honestly couldn't care less, and I look at more like in Equities we've gained share, and we're now bumping up to #1."
He added that the J.P. Morgan name remains best in class as the new year kicks off.
"I am fully happy with it," Dimon declared. "The franchise is strong."
Analysts largely agreed, with the consensus on the stock remaining a "Buy" despite the down quarter driven by a "lumpy" quarter.
Bank of America
- Q4 EPS of $0.70, ($0.63 consensus) on strength of Consumer Banking and Global Wealth and Investment Management unit results along with cost controls.
- Q4 revenue of $22.7B beats the average analyst estimate by $390M; increases from $20.4B a year ago.
America's second largest bank, Bank of America, saw its profit doubled in the fourth quarter from a year earlier when the bank took a big write-down related to passage of the 2017 tax law.
"BAC remains one of our top two bank selections," Wells Fargo analyst Mike Mayo said. "It had record fourth quarter earnings from the 3 C's. First, Consumer had record efficiency, controlled deposit costs, and 8% YoY growth in checking accounts...Second, costs were favorable year based in both the fourth quarter and for the year 2018...Third, credit remains good based on chargeoffs."
The strong result bolstered an over 7% gain for the stock after its earnings release that beat both top and bottom line estimates.
Still, FICC was weak for the quarter, down 30% quarter over quarter and down 15% year over year, mirroring the weakness reflected in its predecessors.
Nonetheless, the industry leading result came second only to Goldman Sachs GS in terms of stock implication.
- 4Q EPS beat of $6.04 ($4.30 consensus) as net interest income rose and operating expenses and income taxes declined.
- 4Q net interest income of $991M increased 16% from Q3 and 10% from the year-ago quarter.
- 4Q net revenue of $8.08B ($7.496 consensus) unchanged from a year
- Advisory revenues leapt 56% year over year, to $1.2 billion, bolstered by M&A activity.
Wednesday's Stock of the Day meant the banking sector saved the best for last.
Shares of the New York banking behemoth rose more than 10% at their highs and closed the day up 9.52% after blowing earnings estimates out of the water.
"We continue to see a business that has steadily grown its tangible book value while RoTCE has increased to multi-year highs," the Action Alerts PLUS team wrote in its earnings report on its biggest bank holding. "It is refreshing to see a dirt cheap and hated stock like Goldman get more respect today in reaction to the print."
The team highlighted the fact that the stock was being punished too heavily for its connection to the Malaysian sovereign wealth fund scandal, a subject that was deftly navigated by CEO David Solomon.
"I value Goldman Sachs at about $245 a share; barring a going private transaction this is a reasonable two-year price target providing a compounded annual rate of return in excess of 20% a year," he commented when bestowing the "top pick" status in late 2018. "Warren Buffett has taught us the value of being greedy when others are fearful."
- 4Q Revenue: $8.458 billion ($9.297 billion consensus), down 11% year over year
- 4Q EPS: $0.80 ($0.89 consensus)
- Institutional Securities: $3.839 billion ($4.334 consensus), down 15.12% year over year
- Fixed income sales and trading more than offset strong results in investment banking, especially in M&A advisory
- Wealth Management: $4.144 billion, ($4.451 consensus), down 6% year over year
Morgan Stanley (MS) missed big on Thursday to quickly kill what was a bullish trend among banks when it released its earnings on Thursday morning.
CEO James P. Gorman blamed the result on a "challenging quarter", but the results come in as the worst of the week, suggesting Morgan Stanley is starting the year as a laggard in the sector.
"This was a messy and, in some regards, cleanup quarter," Wells Fargo analyst Mike Mayo said. "But the extent is unclear."
Mayo, along with every analyst surveyed on earnings day by FactSet, trimmed their price target on the day as the mess remains to be cleaned up.
The consensus for the stock remains a "Buy", however, as many analysts pointed to the possibility of a swift snap-back into shape for the big bank.
The disappointing report on earnings and subsequent analyst research produced a share reaction in line with the result, sending shares south by over 4% on earnings day.
The big bank occupies the bottom rung for fourth quarter earnings as a result.
As banking stocks lead the market out of a malaise from the fourth quarter of 2018, many might be tempted to take profits from even those showing proficiency on their report cards.
Jim Cramer is cautioning investors against this outlook.
"It's not too late to buy them. There will be plenty of people who say 'finally I am back to even -- time to go.' I am urging people to think the other way," he advised. "When the non-initiated see these kinds of moves they want in, and I think that's just what's going to happen next in a once moribund but now exciting group."
For more from Cramer, tune into the replay of his members call on AAP where he discussed the results. The video replay is available here.